When it comes to winning in the software-as-a-service (SaaS) world, as a rule tech startups require significant capital investment.
In order to attract and pass the litmus test for venture capital investors, startups need to speak the right language, and be able to demonstrate that their business can capture the market.
For the next ten days, six Australian SaaS business are participating in the elevate61 US tour – from a variety of industries. All of them are B2B (Business to Business) enterprise sales businesses. And one of their key questions is “If I am a SaaS B2B enterprise sales business what do investors want to see?”
On the first day of our trip, in Los Angeles, they have posed this question to a range of expert advisors and investors. And the consensus is that, far more so than for consumer focussed businesses, enterprise SaaS business need to be able to prove themselves through hard numbers.
If you are a B2B SaaS based business and talking to investors it is critical that you can speak to these and demonstrate that you have a good understanding of the key metrics that matter to your business.
Here are the five basic numbers to live by:
- CAC – Customer Acquisition Cost: How much does it cost you to acquire customers? You need to include your marketing costs, sales costs, founder time, support costs – everything and anything that goes into acquiring the customer.
- LTV – Lifetime Value: What is the value of a customer to your business, i.e., how much income will you generate? This one is a little misleading as it says “lifetime” but in VC speak this means how much income will you generate from the customer in the next 12-18 months. And if your CAC is greater than your LTV you have a problem.
- MRR/ ARR – Monthly or (Annual) recurring revenue: How much recurring income will you get each month? This will show how much of your monthly income is contracted vs what you need to sell above this to achieve targets and growth projections – it also shows the stickiness of your product.
- Average Contract Size: What is your average deal size? Particularly important for a B2B SaaS business is being able to show scalability and a path to profitability. And if your average contract is below $10k per month expect to be challenged on both the scalability of your business and the path to profit.
- Sales conversion: Can you convert trial customers to paying customers? It is common in the early stages of a business to offer free or discount trials of your product. This is helpful to get customer feedback and validation that the product you have built meets a genuine need and solves a real problem. The key step in this validation process is when a trial customer is willing to become a paying customer because this means they value what you are offering – if your customers value it so will investors. This is a key metric at the seed raise stage.
Above and beyond these five measures, there are a host of other metrics to demonstrate the performance of a SaaS business, from customer churn to unit economics. But without the five listed above, even starting a conversation with an investor will prove challenging.
For more information on the elevate61 trip – view the daily blog at www.elevate61.com.au/